City of London office rents will rise sharply this year thanks to improving confidence among financial institutions and supply shortages, according to a report that plays down fears that banks are fleeing the UK.

A lack of office space and the strongest demand for two years will push up rents in the City of London by 10.5% in 2010, according to property consultants King Sturge. That would mark a significant reversal following a 40% fall over the course of the financial crisis, when banks and other City tenants slashed costs.

Despite reports that banks and hedge funds are considering moves overseas because of the government's new tax on bonuses and a wave of public anger, King Sturge's report predicts the capital is set to lead an office market recovery on the back of financial sector demand. It says rents will rise to £47.50 per square foot by the end of 2010.

Mark Bourne, head of City agency at King Sturge, says threats of an exodus are not being carried out.

"We put it down to sabre rattling by some of the powerful men in banking who have got a voice. But London is linked to the global recovery and that's too important for banks to move away from," he said.

"We expect any effect (of institutions leaving) will be negligible or marginal." He expects this year to bring "further internationalism" of the City as banks from China, France and elsewhere set up big offices.

King Sturge is similarly optimistic about the outlook for London's West End, which it believes will see "a return of the boutique financial organisations, coupled with an acute shortage in supply". It forecasts West End prime rents will approach £70.00 per square foot, a rise of 7.6%.

However, the 2010 outlook stresses that London's rise will not be replicated elsewhere, and the gap between the capital and the rest of the country will widen. "Demand will remain under pressure outside London as the public sector squeeze begins, though central government relocations and banking may provide upside. Of the major centres, Manchester and Bristol are best placed for recovery," King Sturge says.

It predicts that after a softer fall rents outside London will continue to decline, albeit at a slower pace than in 2009.

Evidence from surveyors polled by the Royal Institution of Chartered Surveyors also points to office rents stabilising or perhaps even rising this year.

Its senior economist Oliver Gilmartin notes that property developers were also hurt by the credit crunch thereby affecting supply. He played down the impact of banks leaving the UK for places such as Switzerland on tax grounds.

"Some financial firms may relocate to other tax territories which they see as preferable, but the office rents tend to correlate quite closely with what is happening in the global economy," he said.

"You might get at the margins some firms relocating, but if the wider dynamic is one in which global growth is picking up and development was curtailed as part of the credit crunch... you can envisage rises."The report echoes optimism about London rental rates from property companies such as Land Securities, British Land and Minerva, which in mid-December announced a 20-year lease with international law firm Clyde & Co at its St Botolphs site for £48 per square foot.